City dealers who rig Libor should face criminal charges and jail, the head of the review into reforming the benchmark interest rate has said, as he promised swift action to repair the "broken" rate setting system through tougher regulation.

Martin Wheatley, a senior regulator at the Financial Services Authority, said on Friday that other institutions faced similar punishments to those handed out to Barclays, which was fined £290m this summer for its attempts to manipulate the rate used to set borrowing costs for companies and households around the world.

He recommended that the FSA should regulate the Libor system, and told the Today programme that in the extreme cases those who manipulate Libor should go jail.

"I think society has lost confidence in banks," he said. "We're going to be on the front foot"

The firms involved in Libor were regulated but not the market itself so Wheatley wants the law to be changed to make it an offence to make a false or misleading statement to manipulate Libor.

"This would enable the FSA to use criminal powers for the worst cases of attempted manipulation," Wheatley said in a speech as he published his review into the 25-year-old market.

But while he believed Libor could be preserved, he called for an international discussion about alternative benchmarks.

News agency and data provider Bloomberg was quick to say it was looking at devising alternatives, but Dan Doctoroff, the president of Bloomberg, admitted: "I agree with the observation that Libor cannot be immediately replaced, but must be immediately reformed".

Libor, the London interbank offered rate, represents the prices banks pay to borrow from each other. Addressing an audience of City figures in London's Mansion House, Wheatley said: "The reason we are here … is that we have been misled. The system is broken and needs a complete overhaul. The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust – it has torn the very fabric that our financial system is built on."

"Today we press the reset button," he said.

"Governance of Libor has completely failed resulting in the sort of shameful behaviour that we have seen. This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system".

Libor is set by a panel of banks asked the price at which they expect to borrow over 15 periods, from overnight to 12 months, in 10 currencies. The rates the banks submit are published on the same day.

Wheatley proposes that those 150 benchmark rates are reduced to just 20 – in five currencies and four maturities. More banks should participate in making submissions, but he is proposing that the individual rates submitted should not be published for three months to avoid a rerun of 2008 when, at the height of the banking crisis, rates were artificially reduced to avoid any stigma of appearing to be in trouble.

The managers of the so-called submitters should be subjected to direct authorisation by the FSA, and a code of conduct drawn up for the operation of the rates.

Wheatley, who is head the Financial Conduct Authority, when it is spun out of the FSA next year, attacked the "careless" way the rate setting process was overseen by the British Bankers' Association, which will be stripped of any further involvement. A tender process for a new body to oversee Libor starts on Friday. Baronness Hogg will lead the panel selecting the successful bidder.

Wheatley also wants the banks involved to "stand up and take responsibility".